Thursday, March 16, 2017

Beware of "thinking like an economist"

The idea of "thinking like an economist" is, in principle, a good one. It often helps to think of the world in terms of incentive compatibility, constrained optimization, supply and demand, competition vs. barriers to entry, strategic interactions, present value, marginal vs. average effects, externalities, etc. These are all things that economists think about. And there are empirical techniques that mostly aren't specific to econ, but which empirical economists use a lot, that are also good to think about - endogeneity, omitted variables, conditional vs. unconditional probabilities, signal extraction, and so on. And it's generally cool and useful to be able to think like an applied mathematician in general - to be able to construct formal, quantitative models to represent ideas you have about the way the world works. So there are many ways that it can be useful, fun, and mind-expanding to learn to think like an economist.

And there really are some books out there that will help you do this. Tim Harford's The Undercover Economist is my favorite of these, but there are other good ones as well. In fact, I'd like to see more of these books, dealing with more sophisticated and modern econ concepts - I think much of the general public can handle it.

But this good stuff isn't necessarily what people mean when they say "thinking like an economist." The aura of mystique and esoteric wisdom that the econ profession was (unjustly) awarded from the 1980s through the early 2000s has, unfortunately, allowed a bunch of people to pass off lazy, sloppy thinking and pure political ideology as "thinking like an economist."

For example, take Tom Sargent's 2007 graduation speech at Berkeley. Sargent gives what he claims is a "summary of economics", but it's mostly just a list of potential reasons to distrust government intervention in the economy. This was just free-market ideology masquerading as econ, since econ research hasn't given conclusive support to most of the assertions Sargent makes. In his book Economics Rules, Dani Rodrik backs me up on this point.

As another example, take this 2003 talk by Penn State economist Russell Cooper. Here are Cooper's six basic "principles of economics":

Individuals (including households and firms) act optimally

Competition works

Measurement matters

No free lunches

Government intervention with caution

Correlation is not causality

Points 1, 2, and 4 aren't even right. Individuals don't always act optimally, else there would not be a field called behavioral economics. And Cooper's justifications for assuming individuals act optimally - for example, his assertion that those who act suboptimally will be driven out of the market - are well known to be false. Competition doesn't always work, else there would not be a field called industrial organization. And "free lunches" obviously do exist in many cases; they're called Pareto improvements. As for point 5, it's just the same ideology Sargent was dishing out.

There are plenty of examples of people, including some economists themselves, trying to pass off free-market ideology as economic intuition. Other times, people say "thinking like an economist" when what they really mean is "ignoring social norms in public discussions".

But I think the biggest danger of the idea of "thinking like an economist" is that it promotes the idea of economists (or people trained in econ programs) as sages or gurus possessing esoteric wisdom. Smart, sensible people who are perfectly capable of thinking about incentives, constraints, externalities, strategic interactions, etc. are often at a loss when some economist (or, more often, some econ writer or think-tanker) blithely contravenes them, assuring them that if they were truly able to "think like an economist," they would see the error of their ways, but failing to explain exactly what that error actually is.

But an economist when considering a policy of banning autonomous vehicles can think of a lot of other impacts besides the jobs saved and the continuing deaths from human driven cars if such a ban is put in place. One of the things we would think about is how such a ban will effect the incentives to discover future innovation that might also people out of work. We would think about how putting more power in Washington would encourage lobbying for protection. We would think about the children and grandchildren of today’s workers and how restricting technology and changing incentives would affect things. These ideas are not rocket science. But they come easily to economists and not so easily to non-economists. Thinking like an economist is very useful.

I'm certainly not in favor of banning autonomous vehicles! But I fail to see why the issues and questions Russ raises wouldn't be accessible and even obvious to a non-economist. Does it take an economist to worry about technology bans reducing the incentive for innovation? No. Does it take an economist to worry about the power of lobbyists? No.

Suppose someone supported a ban on self-driving cars, because they believed the disincentives for innovation and the incentives for lobbying wouldn't be too severe. Should they change their mind just because someone who claims to be able to "think like an economist" (but who presents no formal model or empirical study) says otherwise? I say no. That is placing way too much faith in esoteric wisdom. If an expert or guru can't point to some research that supports his pronouncements, you shouldn't trust that his brain just works better than yours.

So while "thinking like an economist" is in principle a good thing, beware of people who claim to know how to do it. There's really nothing magical or esoteric about it. And if you think learning to do it means indoctrinating yourself with free-market ideology, you've been conned.

11 comments:

This post reminds me all too much of my intro to macro and micro textbooks. I always felt like the intro classes were just libertarian indoctrination for general audiences with no expectation the majority of the class would move on to other higher level courses. Luckily, I've never had a teacher who was an ideologue, they've all been really fair minded and avoided ever getting too political on the political economy side of things.

I agree. When I state that an economics principle is "people respond to incentives" in ECON 101 I immediately follow it with the statement that "Isn't this obvious, trivial even? But if it is obvious why do so many people act as if it is not?" I then follow up with a few examples. Companies like Microsoft who tried stack ranking (lowest 10% performing in a team get cut every year) and who are then shocked! shocked! that team members form coalitions to help them friends and refuse to help other teammates... There are countless examples of people ignoring incentive effects...

i think what Russ is referring to here is that the public discourse (unfortunately) really often stops at the point where a politician claims that a certain policy will generate or destroy jobs. In my view it really comes hard to many commentators of public policy to see other consequences. And this is not because understanding the other things that might be going on is terribly hard and requires advanced calculus but because "the unseen" is easily ignored by people who did not go through a process of sesibilisation

The thinking economistComment on Noah Smith on ‘Beware of "thinking like an economist"’

What it means to think like an economist is well-defined: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals. Our behavior in judging economic research, in peer review of papers and research, and in promotions, includes the criterion that in principle the behavior we explain and the policies we propose are explicable in terms of individuals, not of other social categories.” (Arrow)

The definition of the subject matter translates into the following hard core propositions, a.k.a. axioms: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)

So, thinking like an economist boils down to: “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.” (Krugman)

The problem with the maximum-and-equilibrium world is that it consists of NONENTITIES: constrained optimization, rational expectations, equilibrium. One must be a rather feeble thinker to accept these green cheese assumptions as premises of economic analysis. Economists do this since 140+ years.

Those economists who do not subscribe to HC1/HC5 are called heterodox economists. Unfortunately, Heterodoxy is good at debunking but failed to replace the neoclassical starting point with something better. As a result, the current state of economics is this: the four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, materially/formally inconsistent, axiomatically false, and ALL got profit, which is the pivotal magnitude of economics, wrong.

No economic advice ever had sound scientific foundations. Obviously, “thinking like an economist” does not yield acceptable results. Noah Smith tries to save the situation and to put some lipstick on the dead pig: “So while “thinking like an economist” is in principle a good thing, beware of people who claim to know how to do it.”

The fact of the matter is that “thinking like an economist” amounts to accepting proto-scientific cargo cultic rubbish as science. No thinking being will ever do this.*

Egmont Kakarot-Handtke

* See ‘Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist’https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2207598

If you had to make a survival guide for living in today's mediated world and you were to title your survival guide, "How to Protect Yourself from Ideological Indoctrination" what would your top ten tips be?

Thinking like an economist usually just means thinking like a calculating utilitarian, who tries to calculate the net benefit/cost of a given proposal while considering a broad amount of indirect effects over time. Be honest, when was the last time you heard a non economist/non econ fan talk about broad regulatory incentives to innovate for firms regarding a proposal that isn't obviously anything to do with that? When was the last time you heard a psychologist or sociologist frame policy issues in this kind of language? The reason I decided to study economics is because, when I used to read many debates and discussions it was usually the economists that would take the most utilitarian approach and consider 'incentive compatibility', while people in other fields might frame this in more intuitive normative aspects or in terms of class relations, and actively shun the concept of utilitarianism as immoral.

^Britonomist gets it (although I would add scarcity to the mix). This whole blog post misrepresents what thinking like an economist actually means and instead evolves into a persnickety whining against Sargent's speech and Cooper's talk as if they used the word "principles" or "summary/lessons" in an absolute sense.

My favorite quote from the post: "If an expert or guru can't point to some research that supports his pronouncements, you shouldn't trust that his brain just works better than yours" This really seems to be a consistent theme for Noah Smith which I agree with. Good post.